Buy coins with investment money and file for bankruptcy... VCs hit hard by ‘intentional bankruptcy’ startups

Startup Company A receives investment funds and invests in Bitcoin... After filing for bankruptcy
Startup Company B, after receiving investment from VC, moved its business partner to a representative private corporation and virtually went bankrupt.
Venture industry: “Case of violation of duty of good faith… Self-correction must take place”

Startup Company A is in litigation with a venture capital (VC) company. This is because Company A used the investment funds to purchase cryptocurrency such as Bitcoin, contrary to the contractual purpose. VC filed a civil suit against Company A, requesting restoration of funds and compensation for damages. The criminal case filed charges of embezzlement or breach of trust. Previously, VC signed an investment contract with Company A that imposed joint liability, joint guarantee liability, and penalties for breach of contract, but it was not enough to prevent the misappropriation of investment funds.

After receiving investment from a VC, startup company B moved all of its clients from the existing corporation it pioneered to its new corporation. Investors filed civil and criminal lawsuits for violation of non-competition obligations and trade secret obligations, saying that as a result, the existing corporation's debt rapidly increased and it eventually filed for bankruptcy.
 

According to the venture investment industry on the 13th, the worries of VCs and investors are deepening as some startups have recently intentionally filed for bankruptcy after using investment funds for personal purposes. This is because if a corporation goes bankrupt, the corporation and its debts disappear together, making it difficult to recover the investment.

Kim Won-sang, senior attorney at Daeryun Law Firm, said, “There are often cases where corporate bankruptcy is filed for the purpose of embezzling corporate assets.”

Attorney Kim explained, “Under the law, a corporation can be declared bankrupt as long as it falls into the category of excess debt (debts exceeding assets), and the corporation is taking advantage of the fact that its debts are extinguished because there is no separate exemption decision (decision that the remaining debt must be repaid).”

Although the company did not intentionally file for bankruptcy, there are cases where the moral hazard of the individual representative was an issue.

‘Noda Lab’, a big data-based B2B trade transaction platform established in 2021, plans to go through bankruptcy procedures. This is because the CEO fled abroad after using the investment funds without going through legal procedures.

A VC who had previously invested in Noda Lab raised an issue with the company's representative, believing that he had misappropriated the funds for personal use. The CEO reportedly returned the funds, claiming that he had used them for the company and not for personal purposes. However, the CEO is still absent, preventing the corporation from going through bankruptcy procedures.

In 2023, Yoo Jeong-beom, CEO of Vroom operator Mesh Korea, withdrew and spent a total of 3 billion won without permission from the board of directors or court while the company was undergoing corporate rehabilitation procedures due to worsening liquidity. In July of this year, the court sentenced CEO Yoo to four years in prison on charges of breach of trust.

The problem is that if the moral hazard of startups continues, the trust of VCs and investors will decline, and investment sentiment will likely decline.

One startup official said, “Investment in startups is just expanding, but I am concerned that VC trust will decline and investment sentiment will decline due to individuals’ moral hazard.”

There is also a view that it is nothing more than a deviation of some individuals. An official familiar with the startup industry said, “Since 2005, with the launch of Korea Venture Investment, the government’s management and supervision functions have been strengthened, and in the private sector, accelerators (ACs) have emerged and close management is in place. As most startup CEOs are conscientiously focusing on the growth of their companies, I hope that some cases are not seen as the whole.”

Experts point out that individual self-purification is more important than supplementation through institutions.

A venture capital official emphasized, “If the representative does not fulfill his duty of good faith, the VC that manages the risk has no choice but to tighten the management,” adding, “As this ultimately imposes sanctions on the founder’s active start-up activities, personal self-purification is necessary.”

Reporter Kim Jeong-eun (xbookleader@chosunbiz.com)

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